Ecolab: Unfavorable FX And Higher Interest Rate To Consider (NYSE:ECL)

Modern wastewater treatment plant. Tanks for aeration and biological purification of sewage at sunset

Vladimir Zapletin

After our recent initiation of coverage and our deep-dive into the Q2 results, today we are back scrutinizing Ecolab’s (NYSE:ECL) quarterly accounts. Our buy case recap was supported by an upside on both macro and micro aspects; however, following the half-year numbers, we decide to make some minor changes in our forecast model with two negative catalysts that were reducing the company’s profitability: FX and higher energy prices. For the above reason, we slightly reduced our EPS and decreased our buy rating target to $180 per share (from a previous rating set at $185).

Looking at Ecolab’s press release, we continue to note that these negative trends are still affecting the company’s core business. In detail, EPS was impacted by unfavorable currency development by $0.08, and higher energy prices were again a major drag in the operating profit bridge, compared to last year’s end results (Fig 1). Important to mention was the negative impact of higher interest expenses recorded in the quarter for a total amount of $0.06 at the EPS level. Even if reported interest expenses were lowered by 15% on a yearly basis, due to the Purolite acquisition and with the rising interest environment, Ecolab’s interest expense increased by almost 48% (fig 2).

Ecolab EPS impact

Ecolab EPS Impact (Ecolab Q3 Press Release (Fig 1))

Ecolab higher interest rate

Ecolab Higher Interest Rate (Ecolab Q3 Press Release (Fig. 2))

Despite that, we can confirm that there was a sequential improvement in Ecolab’s accounts, and the company set new initiatives to compensate for the raw material inflationary pressure. In detail, the company announced:

  1. New cost-savings plan for a total consideration of €80 million in the EU region in order to mitigate the higher energy price environment. These savings should be permanent. Indeed, according to the company, this should already support Ecolab’s account in Q4 and for the years to come.
  2. New productivity gains across its operations for a total consideration of +3% at the operating profit level.
  3. A lower time to pass-through cost increases with higher selling prices.

Q3 Results

Concerning the Q3 performance, we can note that the company stabilized its gross margin. Looking at the company’s divisions, here are our main highlights below:

  1. Global Industrial operating profit was slightly above Wall Street consensus estimates. This was supported by modest higher volume and strong price increases. In the division, the water treatment and chemicals/refinery segments were beneficial to the company’s accounts, whereas the F&B division was pretty weak. Numbers in hand, EBIT reached $277 million compared to $258.6 achieved last year.
  2. Global Institutional & Specialty EBIT delivered a solid $199 million versus a compared to forecast estimates of $180 million. Organic operating profit grew thanks to new contracts.
  3. Healthcare & Life Sciences division was the weakest and confirm to be the company’s major risk going forward. The COVID-19 outbreak was a clear positive catalyst for the division. Operating profit declined by almost 50% on a yearly basis, and the company clearly missed Wall Street estimates. This was due to the lower use of hand sanitizers and hospital activity. To partially offset the division, the pest’s operating profit rose by more than 10% thanks to higher volumes.

Ecolab Q3 financial snap

Ecolab Q3 Financial Snap (Ecolab Q3 Press Release)

Conclusion and Valuation

Despite the lower results and the miss in consensus estimates at the EPS level, the new measures provided with new saving initiatives and its ability to pass-thought costs should improve Ecolab’s EBIT margin. Adjusted EPS reached $1.30 and was down by almost 6% on a yearly basis. However, the company’s organic sales grew, driven primarily by price increases, and totally compensate for higher raw material pressure. Taking into account the new Europe-focused cost reductions, the company will also be able to offset the expected negative currency development for Q4 (which is estimated at $0.11 per share). The Healthcare division will suffer in Q4 too, and it is important to note that the company’s 25% debt is floating; we expect an additional impact of $0.06 per share on a quarterly basis. For this reason, we reduced our 2023 EPS from $6.1 to $5.85; however, applying our P/E multiple of 30x in our forecast numbers, we still derive a buy rating target at $175 per share.

Ecolab Q4 outlook

Ecolab Q4 Outlook (Ecolab Q3 Results Presentation)

Be the first to comment

Leave a Reply

Your email address will not be published.


*